Tuesday, February 12, 2008

I Dream Of Genie

As Wall Street stomps its feet and demands yet another large interest rate cut, it's worth looking to the past for a possible glimpse at the future. No historical comparison is perfect, of course, and that's certainly the case with this one. But for some parallels read this 2004 article by Bruce Bartlett (new book out, by the way) who revisits the last time we had a faltering economy, rising inflation, a weak academic running the Fed, and -- if this sort of chatter is right -- monetary policy subordinate to political expediency:

With Nixon gone, analysts began to focus on Burns. In July 1974, Fortune magazine ran a long article putting most of the responsibility for stagflation at his door. Since then, it has become the conventional wisdom among economists that the Fed erred drastically by not tightening in 1972 and thereby allowing the inflation genie out of the bottle.

Burns took most of the blame because he had been a renowned economist before joining the Fed. This made it impossible to believe that he simply didn’t know better. Therefore, one is left with the inescapable conclusion that Burns used the Fed to help Nixon with full knowledge of the disastrous consequences for the economy. The only alternative is to believe he was incompetent, which no economist believes was the case.

Read the rest here. Just as the disastrous policies of Nixon and Arthur Burns didn't play out fully until Carter's presidency and Reagan's first few years, we won't see the full impact of current policy for perhaps a decade. But how many people will think of Bush or Bernanke (or Greenspan) at the gas pump or corner store in 2018? How many cursed LBJ or Nixon in 1979?

The White House not only knows the answer to that last question, it's counting on it.

5 Comments:

The disastrous fiscal policies of George W. Bush and the GOP controlled Congress are responsible for both long term and short term problems. Read this excellent article on where the financial picture would stand today if the GOP had just stuck to Clinton's spending projections, even after adding in the cost of Afghanistan and Iraq.

Banks enthusiastically loaning money to people not capable of paying it back...with both groups looking for a bailout from a government incapable of balancing a budget and relying on a printing press and being too "important" in its reserve currency role for the rest of the world to turn their backs on us.